A financial bombshell for millions of retirement savers is hidden away in the government’s latest pension consultation.
Table of contents
Pensions Minister Richard Harrington explains he is looking at ways to safeguard pensions says his foreword in the newly published Green Paper Security and Sustainability in Defined Benefit Pension Schemes
But the devil in the detail reveals he is suggesting that companies should be protected from paying sky-high contributions into their final salary workplace schemes by changing the way cost of living increases are applied to retirement incomes.
Most final salary pensions are updated every year in line with the government’s retail price index (RPI).
Harrington is asking the pension industry to consider switching the annual increase to the rate provided by the consumer price index (CPI).
Pension law change proposed
Both give different results for annual inflation, with CPI invariably lower than RPI.
The proposal would cut pension costs by an estimated £90 billion for employers, but cost each employee an average of £20,000 in reduced retirement benefits.
Three out of four pension schemes are uprated every year by RPI, with scheme rules and legislation stopping companies from changing to CPI or another index to maintain fairness for employees.
“Should the government consider a statutory override to allow schemes to move to a different index, if protection against inflation is maintained?” says the Green Paper.
“In some circumstances, where a company is facing significant financial challenges, it could suspend pension increases altogether.”
CPI returns lower than RPI
“Allowing all schemes to move from RPI to CPI would have a significant impact on members’ benefits. CPI has been lower than RPI in 22 years out of the last 27 (and nine years out of the past 10) up to 2015, and so would likely represent a reduction in members’ benefits.”
The minister has made no policy recommendations from the report, but is asking unions, employers and the financial industry for ideas and opinions.
“We all have a responsibility to ensure the system works in the interests of everyone – employers, schemes and scheme members,” said Harrington.
“This paper sets out the evidence we have available about the key challenges facing DB pension schemes and highlights several options that have been suggested to us to improve confidence in the system.”
Around £1.5 trillion is managed by 6,000 final salary pension schemes with 11 million current and future pensioners. The average pension pot pays £7,000 a year.
Related Articles, Guides and Insights
Below is a list of some related articles, guides and insights that you may find of interest.
Questions or Comments?
We love to get feedback from our readers. So, after reading this article, if you have any questions or want to make comments, send us a message on this site or our social media?
Don’t forget that you can also request the guides sent directly to your email inbox.